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Small-Business Health Care Reform, in Theory and in Practice

By Robb Mandelbaum July 28, 2009 10:39 amJuly 28, 2009 10:39 am

Correction appended

From distant corners of the blogosphere come two dispatches on how health care reform might affect small firms. Rita McGrath, a consultant and a member of the Columbia Business School faculty, offers up a bucket of theory in a post published last week on her Web site.

Ms. McGrath says she “works extensively with leadership teams in Global 1,000 companies who wish to hone their ability to drive strategic growth,” but for a few paragraphs, she sets her sights on the small fries. Borrowing a notion from William J. Baumol, a leading American scholar on entrepreneurship, she writes that “a nation gets the type of entrepreneurship it rewards.” And Democrats in the House of Representatives, who have proposed a surtax on the wealthy and a requirement that all firms either provide health care or pay up to 8 percent of payroll to a trust fund for a new health insurance exchange, are about to “fundamentally alter what Baumol called the ‘structure of incentives’ that shape how entrepreneurs allocate their energies.”

Ms. McGrath envisions a not-so-brave new world where “small-business people and those falling into the higher-tax categories spend their time not producing new innovations but figuring out how not to fall into the maws of increased tax and regulatory burdens.” Anticipating an exemption for firms with fewer than 25 employees, she foresees “thousands of businesses employing exactly 24.5 people, all interconnectedly doing business with one another rather than falling foul of the over-25 employee stricture.”

The Agenda, though, is skeptical. For one thing, there is no exemption for firms with fewer than 25 employees in the House bill. The legislation requires recalcitrant firms to pay a percentage of payroll that increases as payroll increases. Firms with less than $250,000 in wages pay nothing, those with over $400,000 in wages pay 8 percent, and those in between pay somewhere in between. If the House has its way, the advantages of staying small will not be nearly so clear-cut. (One Senate version of the bill, however, does have a 25-employee exemption; Ms. McGrath makes a convincing case for not adopting it.)

But will entrepreneurs deny us their innovative instincts because they are too busy applying those instincts to weaseling out of their obligations? Probably not. Truth be told, most entrepreneurs are not terribly innovative, as Professor Baumol himself told me a couple of years back. Instead, they merely replicate existing business models (shoe stores, say, or ice cream parlors, or clothing makers), and they add only incrementally to the economy. The ranks of the true innovators, Professor Baumol believes, are small, and their contribution to economic output is outsize.

And most of them probably already offer insurance. In fact, according to the Kaiser Family Foundation, the vast majority of all firms with more than 10 employees do — and the figure rises to 90 percent among firms with over 25 employees. Among the innovators, it is surely higher. That’s because companies don’t innovate by extracting the last ounce of sweat from their toilers, but by harnessing intellects, and compensating well for it. An H.R. consultant to technology firms once told me that health benefits in that industry are universally generous, because not offering them would place a firm at a competitive disadvantage.

Already, companies that offer insurance are devoting much of the energy they could otherwise spend on conducting trade (or producing innovation) on trying to negotiate an affordable policy. Or any policy at all. That is the moral of the story offered by Jonathan Weber, founder and chief executive of New West, a small Missoula, Montana-based* media company. Mr. Weber writes the Making Payroll blog at The Big Money, and in Monday’s post he recounts how his insurer tried to knock his company off its rolls after a particularly claim-heavy year. “I had to spend several days sweating this issue, working with our office manager to fix it, trying to decide whether to tell people about the problem or wait until we got it resolved,” he writes. “A system in which we are subject to the shifting policies of an all-but-unregulated private insurance company that effectively has the power to deny our ability to get coverage anywhere is absurd.”

Ultimately, Ms. McGrath has a larger point to make: health care reform will lead us inexorably down the road to Sweden, with its dangerously high standard of living. “It is well accepted, and has been for decades, that the desire to have a vibrant entrepreneurial economy is at odds with the desire to operate a welfare state,” she writes. “If it is possible to live quite a comfortable life without too much bother, why take on the long hours, the worry and the headaches of small-business ownership?”

But most Americans, as Ms. McGrath no doubt recognizes, are not entrepreneurs, just as most entrepreneurs are not innovators. And if the costs of an “entrepreneurial economy” to those nonentrepreneurs include health care that’s prohibitively expensive, why would they want one?

—*An earlier version of this post misidentified New West’s hometown as Denver.

How about the innovators and entrepreneurs that never start up because they can’t leave their job that provides health insurance?
American business will adjust, just like Canada. Canada is a great place to do business because health care costs are not paid on the back of business alone.
How about a tax on high fructose corn syrup products? or any sweetened drinks? Or increased taxes on alcohol? We tax tobacco products highly because we want to discourage unhealthy habits and because tobacco users contribute to high public costs. We could do the same with unhealthy foods.
We need primary care clinics for everyone with increased numbers of nurse practitioners/physician assistants and a good net work for triage of care.

The underlyimg fallacy in this entire arguement is that healthcare insurance should be employment based. Imagine if automobile insurance were contigent upon employment…on second thought don’t. You can redecorate a house all you want, but if the foundation has cracks and leaks you still have a lousy house. The basic foundation of our health insurance system is the problem.

We should gradually move away from the employment based model into something that more closely approximates auto insurance. There are scores of companies competing for business, coverage can be tailored to fit specific needs, and good drivers are rewarded with better rates. A one size fits all government plan comp[letely misses the boat.

Correct! The U.S. will never be a Sweden. However, the U.S. will become a much different place in the next thirty years…and not for the better if we don’t suck it up and make some very hard decisions.

Like too many of us we are one paycheck and one illness from going broke. Well guess what, the U.S. is also just one more ‘paycheck’ and one more ‘illness’ from economic collapse. Anyone who thinks we can keep going this way…enormous debt, huge dispartities in income, etc. is dreaming.

“How about the innovators and entrepreneurs that never start up because they can’t leave their job that provides health insurance?”

Excellent point. Economic research suggests that when offered government provided health insurance such as VA, educated workers are actually *more* likely to become self-employed, not less.

Additionally, there are only political reasons for health insurance to be employment-based. Economically it is most efficient to have one large group. Doing so would remove adverse selection problems. The case of car insurance provides a mandate– if you have a car, you must have insurance. Therefore bad drivers cannot push good drivers out of the market (soving the lemons problem in auto insurance). However, with the current status quo, it would be very difficult to move completely away from employer-based coverage, and all of those related problems must be worked around.

I think many of us that work with, or for, small business would love to see health insurance handled outside of our purview. The time and cost associated with managing plans, including the need to review and switch every year in order to avoid ridiculous increases, informing employees of the changes and the application processes, deciding how much to burden the employees with the cost, handling payroll deductions, etc., etc. I think it would just be easier to pay more corporate or indidvidual income tax as a fair trade. It would make it much easier for all of us to compete in an increasingly global marketplace, where most foreign players aren’t saddled with the same burdens because their governments handle it.

RLK in the 2nd comment points to a Forbes/CNN web site. Shawn Tully the author of the article must work for an insurance company. Some of the points he makes ALREADY exist. Health insurance companies routinely publish a list of doctors and hospitals that will take their insurance. If I want to use my existing doctor or a hospital not on their list, I have to PAY the full bill.
If we have national health care, why would we even need health savings accounts or choose high deductibles?
Health insurance companies ration care now by denying claims. A national health plan would also have to ration care, there will be no way around it.

Whether the size of the business is small or large, hopefully we can all agree real solutions to America’s crisis MUST concentrate on fundamental cost reductions and modern management practices. The industry is a profit driven hodge-podge, and dysfunctional private insurance adds billions in overhead yet contributes zero value to actual care – a glaring imbalance that efficient free market manufacturing operations would immediately weed out. Solutions must correct other underlying problems as well – unequal distribution of services, poor quality control, and an industry dominated by self interest entrepreneurs and middlemen. Many U.S. non-profits offer innovative models to build on – not the stereotypical down and outs, but clean modern clinics with top staff that deliver high quality medical and dental services to everyone who walks in the door – insured, uninsured and Medicaid/ Medicare alike. We can no longer tolerate exclusive business contracts between profit center “providers” (formally doctors and hospitals), grossly inflated pharmaceuticals, an artificially constricted supply of family practitioners, policy agendas written by campaign contributors, and revolving door regulators – and simply frame discussions in terms of “more coverage” and voodoo “socialism”. Otherwise, despite vastly expanded private insurance and unlimited taxpayer funding, American healthcare will continue to rank 43rd in performance, and No. 1 in cost.

As with comment #4, I do not understand why it is the “duty” of a business to provide health insurance. This was a benefit that was offered to entice top talent. If the government is going to take over insurance, then the employer has no incentive to offer it, and certainly has no responsibility to provide it. And shy should a business owner be fined for choosing to offer some other type of compensation or benefit instead of health insurance? That it should now be considered a “duty” for a business owner to insure employees is a ridiculous leap. Are you going to be required to pay everyone’s homeowner’s or renter’s insurance next ?

I’m self employed. I pay $1,100 per month for a basic HMO that is one step above a hospitalization plan and one step below a PPO. I can’t take the cost of the insurance as a business expense the way that corporations and bigger businesses can. I can’t buy insurance as part of a group..so I pay premium rates. American workers are trapped in their jobs because they can’t afford the insurance to cover themselves if they do. Small shops like mine can’t afford to hire people because the cost of health insurance prevents us from doing it. I don’t care where the relief comes from…whether its single payer, government option, equitable tax treatment, something else. I’m tired of a bunch of pundits, ideologues, and public relations professionals screaming about policy when they haven’t walked in the shoes of the self employed.

I own a small business. I have ran businesses for more than 25 years. Who are these people that claim to speak for small business owners? How come so many of them are aligned with Big Business? The politicians that claim to have our best interests at heart take money from these huge corporations to stay in office; and then vote for legislation that benefits only those same huge corporations. all with a straight face..
I have cancelled my NFIB membership because of their stance on the recent health care debate.
After decades as a moderate Republican, two years ago I re-registered because I was (have been, and still am!) sickened by the divisive, hateful, anti American people, pro-corporate greed baloney pushed by the Republican leadership. And even after dismally failing politically, I am seeing even more garbage being generated by the “conservative” nut cases and the dregs of the GOP.
Get a grip, folks. It is not about Obama. It is all about why the American people put him in office.

I was the Director of Administration and later Vice President of a small company of about 150 people in the Washington DC metropolitan area for 25 years, until 2007. One of my primary responsibilities was managing the company’s health insurance and benefits program for our staff.
When I started in the very early 80’s, the process basically consisted of finding an insurance broker somewhere, putting together a census (number, ages, families, etc.) of our employees and then reviewing 5 or 6 proposals from various health insurance companies. There was always a high and a low but basically there was usually a good in-between of the health insurance most of us were accustomed to at the time — $100 deductible, 80/20 percent copays, what have you.
In spite of having a staff who were overwhelmingly young (under 40, many under 30) and therefore relatively healthy, before MRI’s were in common use, before colonoscopies existed, before Paxil, before HIPAA, we experienced double-digit increases in our premiums to the insurance companies every single year. Maybe once it was 9 percent. This was despite spreadsheets showing how much premium we paid in over a 12-month period and how much the insurance company had paid out –which almost always demonstrated that the insurance company made a “profit” on us!
What choice did we have? No health insurance, nobody will work for you. We paid the increases. And we wouldn’t switch companies until it reached a level we couldn’t afford; changing health plans around is hard on employees. I would never wish upon you the experience of employees having to change pediatricians, obstetricians, family practitioners, dentists because we switched to another plan with different rules to save money. For morale and staff retention, we would try not to do it for a few years at a time. We also soon learned the game that when we went out for new proposals from different insurance companies, the low rate we were given was a “low-ball” and the double digits would start right back up in Year 2.
As the insurance companies came up with new ways we had to conform … the Primary Care Physician/Gatekeeper, the PPO. the HMO, I was not spending time growing our business or helping staff develop and succeed, I was spending hours explaining the changes, writing up memos about the changes, having staff sign affidavits that they read the changes, blah blah blah. Fine, fine, fine, we all said, just as long as I have my health insurance. Because now, here and there, stories were emerging in the news of someone without health insurance owing a hospital several hundred thousand dollars, or losing their home. Most of us in management are baby boomers, and our parents had never been concerned with owing a hospital anything, ever, one way or the other – my Dad’s military time, years of working at NASA, everything was covered. Now, without this insurance thing, your life could be ruined.
Up went the costs, double digits in the teens, year after year .. and along with it, in order for us to be able to provide insurance, we started having to REMOVE benefits, as well as raise staff’s share of the premium. Juggle, juggle, every year – who gets hurt the least this year? was the question over and over again.
One year a benefits consultant recommended we try “self insurance” – where the company writes checks to the employees directly for their health claims, and also buys only “stop loss” insurance to protect the company in case claims went over a certain amount – e.g., the first half-million in claims is on us, the next half million and beyond is on them. Since we had seen year after year that we were paying more in premiums than in claims, well, it made sense to give this a try.
And yet after the first year we STILL had to raise the employee’s share of the premium in order to continue the coverage; doctors’ and hospitals’ costs were going up and there were new procedures and new medications turning up every year.
At one harrowing staff meeting, an employee stood up and blamed the cost hike on a particular employee’s major critical illness, of which everyone was aware. Yikes. Our “self insurance” was getting way too personal.
Back to “regular” insurance. Now they tell us — you need a gatekeeper with this plan, you don’t need a gatekeeper with that one. You need to call a hotline first. You need to ask if you can go to the hospital.
We had a gatekeeper in 1990 when my toddler broke his arm; we brought him to the urgent care center that could not X-ray him, but they recommended he get an X-ray immediately. We had to drive 15 miles in rush hour traffic to the facility where he could get the X-Ray, and then drive with it to the hospital that could treat him which was 10 miles back in the other direction. Really. We left home at 3:30 pm and got home at midnight.
My co-worker friend needed an MRI as recommended by her primary care physician for a painful injury; the covered facility was right there in the doctor’s building, too. Except my friend walked into Door Number 2 right next to Door Number 1 in the building, had the MRI, and had the payment denied because she went through the wrong door; Door Number 2 wasn’t in the Plan. Though the cost was exactly the same, the insurer would not pay her claim to the facility or reimburse her for the expense. There was not one difference in dollar cost to the insurance company. But they wouldn’t pay.
A few years ago we were visited by a new kind of health insurance company encouraging us to try the new government idea that people needed to be responsible for their OWN health decisions, and that if people were smart and not stupid they could actually accumulate tax-deferred money that would pile up to the end of time IF we implemented Health Savings Accounts – the latest thing which would save the company money. It worked like this – we would establish a $1,000 deductible for an individual, and then instead of paying a premium, each individual put pre-tax money as a “premium” into an account for them and them only, and so if they were young and healthy, they presumably would pile up the amount in their health account; and if someone were not healthy, making claims, and therefore having little or no money in their health account, well, no problem, because all they have to do is spend up to this $1,000 deductible, and then everything is taken care of by the insurance plan till the end of time. And – promised by the salesman standing there – not one benefit in our current health plan would change with the switch to the HSA with their company. Really, doesn’t it sound great? Because we were always especially sensitive to our employees’ out-of-pocket costs, given that most of them made less than $40,000 annually, we decided that the $1,000 deductible recommended by the insurance company was too high, so the company would pay the FIRST $500 of the deductible, and then only the second $500 would come out of the employee’s pocket. What a plan!
And when presented by the insurance company in front of the entire staff with me doing the introductions, it turned out that way down in the finest of print, the actual new plan did not exactly match up with the old plan, in terms of a few pesky nuances and details. Like, on the second day of the Plan, if something isn’t an emergency and you go to the emergency room, and the emergency room visit is $1,500 (which it typically is), then you have just spent the entire $1,000 deductible plus you now OWE $500 to the insurance company right off the bat, because you didn’t call the Nurse Hotline first when your four year old woke up screaming in the night of horrible stomach pain, and after 30 minutes of screaming you took him to the emergency room and they diagnosed him with really bad gas. Yes, that happened. They WOULD have paid it if he died or were admitted, though, even without calling the Hotline.
And it also turned out that psychologically, not everybody was excited about piling up their little tax-free HSA money…some people resented they were “forced” to put their earnings into a savings plan they can’t touch unless disaster strikes. They didn’t see paying premiums as a negative, but calling this “their” money pile changed their perspective on it. A number did not or would not go to the doctor at all unless it was absolutely necessary, because they were desperate to preserve the first $500 of the deductible paid by the company. Because they would never be able to pay the second $500 out of pocket.
When I left the company in 2007, we were paying the health insurance company over $1 million a year for our staff of about 120. And the staff paid as much as 30% of the premium out of their own pockets.
Before I retired I was at the table-pounding stage – why are small businesses like us – any business at all, really – so responsible for the health and welfare of these Americans that work for us?? It is infuriating and overwhelming to sit in benefit renewal meetings every year and decide, basically, how to hurt the least number of people this year. Imagine what goes on even for the kindest and fairest person when staff layoff decisions have to be made, and right here, you can unload one very expensive person with a long-term chronic illness. Or, right here, if you lay this person off, you can ruin their life.
These shouldn’t be business decisions. It shouldn’t even be on the business table.
I don’t even want to calculate the costs of my time, my team’s time, senior management’s time, staff work hours, billable hours lost, and plain old cash paid out over those 25 years, so that someone could have a baby without going bankrupt when there were complications, or that someone else could survive financially after a car accident requiring months of care.
This is not business’s responsibility. We have assumed this responsibility out of business necessity, and have maintained it because we do care about our staff and do what we can to improve the human condition in general. We would prefer to improve the human condition by hiring more people and paying our people more. We cannot do this in the current health care system.
Ask ANY benefits manager for ANY small business.
Public Option. Now.

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You're the Boss offers an insider's perspective on small-business ownership. It gives business owners a place where they can compare notes, ask questions, get advice, and learn from one another's mistakes. The blog also offers analysis of policy issues, and suggests investing tips.